Question

Consider the market for rental housing in New York City (NYC). The market price for a rental home in NYC is $1500 per month. At this price, one million rental homes are bought and sold. In an effort to help low-income individuals afford housing, the city is considering implementing a price ceiling of $1000.

a)Construct a supply-and-demand diagram that illustrates the effects of a $1000 price ceiling that is implemented in the rental market in NYC. Do buyers benefit? Do sellers benefit? Explain.

b)Suppose the city elects a new mayor who removes the price ceiling. After repeal, the free market would determine the price and quantity of rental housing. How are buyers and sellers affected by the removal of the price ceiling?

c)List and discuss an alternative policy option(s) that would make housing more affordable. What are the pros and cons of the alternative policy or policies?

Answer 1

a) Rental Market after price ceiling

From the figure , we can say that the Buyers benefit from the price ceiling as now they have to pay lower prices for the rental homes and their consumer surplus has increased . However , they will face shortage of rental homes eventually.

The sellers do not benefit from the price ceiling as their producer surplus has declined. Many sellers will exit the market because they wont supply at low rates.

b) After the removal of price ceiling , the market will operate freely and the equilibrium price will be $1500 instead of $1000. The shortage will be satisfied by an increase in supply of rental homes . When the market operates freely , the sellers would benefit as their producer surplus would increase and sellers who had earlier exited the market due to price ceiling would now enter the market .

The buyers will suffer a loss in consumer surplus as now they would have to pay more as compared to ceiling situation . The qty demanded of rental homes will decline . Many buyers will exit the market who wont be able to afford rental homes at higher prices . However, a free market would not cause any dead weight loss and there will be no shortage in the market . Hence , there will be no welfare loss.

c) Alternative Policy Options that would make housing more affordable -:

1) Public Expenditure in Affordable Housing -: Govt must allocate a proportion of budget for builing Affordable Houses for the people. This would make the houses available at cheap prices and solve the problem of housing for low income families.

Pros -: Availiability of cheap housing for low income families .

Con -: It wil lead to either budgetary deficit or cut in the expenditure for other areas.

2) Subsidy To low Income families for housing -: Govt must provide subsidies on rents to low income families.

Pros-: It will save money of low income families which they could use to demand other goods.

Con -: It will create more burden on the society as subsidy will be funded from the tax money of the individuals.